Economy
What India Inc’s Q3 show reveals about the state of the economy
Summary
- In the third quarter, FMCG, auto and consumer durables companies have reported good rural demand. Nonetheless, the microfinance sector is under stress and faces rising delinquencies. What’s happening? We have some answers.
New Delhi: Whatever you can say about India, the opposite is also true, an exasperated Cambridge economist once quipped. On the macroeconomic front, while the country’s waning GDP growth and sputtering mass consumption are eliciting a lot of hand-wringing, not a week goes by without Gurugram or Mumbai reporting such an unreal real estate deal that it puts even the French Riviera to shame.
Small cars are struggling to sell, but many premium sports utility vehicles (SUVs) have waiting periods stretching on for almost a year. Biscuit packs priced at ₹10 are being deemed expensive in some pockets, but demand for deluxe artisanal chocolates is insatiable. And so on.
For a nation as vast and diverse as India, government-issued statistics often fail to capture the economic zeitgeist and undercurrents powering the world’s fifth-largest economy. Which is why the quarterly results of corporate India can offer a better glimpse into vital economic trends and prevalent consumer behaviours.
With the bulk of the Q3 results season behind us, here’s corporate India’s unofficial State of the Economy report.
Staples and struggles
India’s largest fast-moving consumer goods (FMCG) company, Hindustan Unilever (HUL), considered a proxy for the broader consumer sentiment in the country, has once again disappointed the Street with underwhelming numbers.
December-quarter revenues declined nearly 1% sequentially to stand at ₹15,408 crore. The annual growth was modest at 1.4%. Underlying volume growth, a key metric which measures the increase in sales minus the impact of price changes, was flat year-on-year—the weakest print in the past 12 quarters.
The weakness stemmed from moderation in urban demand (amid a sustained recovery in rural volumes) and negative mix partly due to an increase in the share of smaller packs, with consumers resorting to cost-cutting in the face of inflation and macroeconomic challenges.
“Total FMCG volume growth has slowed down over the last 6 months, indicating subdued demand. Within this, urban growth continues to moderate while gradual rural recovery is sustained," HUL’s managing director (MD) and chief executive officer (CEO) Rohi Jawa said at the company’s earnings call.
“Reflective of the current macroeconomic situation, market data for the quarter shows a step-up in the pace of growth for small packs across the portfolio. This seems to be a transitory shift in consumer patterns due to current macroeconomic conditions and moderation in urban growth," he added.
Similar was the case with its peer Nestle India, which posted a modest 3.9% on-year rise in Q3 revenue at ₹4,780 crore. The gap between domestic and global conditions was conspicuous by a revealing statistic—exports in Q3 vaulted 21% while domestic sales (which accounts for 95% of the company’s top line) grew just 3%.
The management attributed this to anemic urban demand and persisting food inflation impacting consumers.
While the e-commerce channel has been witnessing strong traction, Nestle India reiterated its ‘rurban’ (rural + urban) strategy. Total villages covered grew to over 2,08,000 compared to 2,00,00 in FY24 (and just 70,000 in 2020).
“In terms of activation...there are multiple flywheels in India. There is one India which is digital, which is quick commerce, which is e-commerce, which is ordering on the app. There is a considerable part of India which depends on heart activation (physical touch points) and rural and village fares. We have not forgotten that India, because that India is at the core of our consumption," Nestle India’s chairman and MD Suresh Narayanan said at its post-earnings analyst meeting.
The company’s strategy comprises increasing touch points in rural areas as well as launching new offerings tailored for this market, like noodle varieties launched under the Maggi brand at ₹10 price point.
Smaller players in the sector too reported similar trends. Dabur, which derives around 50% of its revenue from the rural market, saw this segment outperform the urban areas for the fourth consecutive quarter.
Biscuits and bakery company Mrs Bectors’ revenue growth moderated sequentially to 15% due to a lacklustre demand environment and higher competitive intensity from local players. Its biscuits business was driven by robust exports even as domestic business growth continued to be subdued amid demand headwinds.
That said, it is not as if the rural-urban divide was limited to consumer staples.
Green shoots
A sustained recovery in rural demand was visible in the Q3 numbers of a host of companies across sectors.
SUV and tractor major Mahindra & Mahindra’s auto segment revenue inched up 4% year-on-year (y-o-y) to ₹22,400 crore, while farm segment revenue grew 21% at ₹8,200 crore. The management has also raised its FY25 guidance for the tractor space to about 10% (from 6-7%), with expected growth of 15% in Q4FY25, buoyed by above-normal monsoons, better Rabi sowing, record Kharif production and minimum support price (MSP) hikes for farmers.
Two-wheeler (2W) company Hero MotoCorp was another beneficiary of rural vibrancy. With a 5% year-on-year top-line growth, this was the third straight quarter of the company, posting revenues in excess of ₹10,000 crore. The rural mix improved 3% for the quarter on the back of faster growth compared to urban markets. The management guided to double-digit revenue growth for FY25.
Some analysts see this trend persisting for the sector as a whole over the medium term.
In a report last month, global investment bank Jefferies noted that two-wheeler demand in India lagged that of passenger vehicles (PVs) over FY21-23 as the combined effect of the covid-19 pandemic and regulatory costs severely impacted vehicle affordability in the less affluent section of society. “2W wholesales subsequently grew 14% y-o-y in FY24, outperforming PVs (+8%). Compared to the respective FY19 peaks, FY24 volumes were still 13% lower for 2Ws but 25% higher for PVs," Jefferies stated.
“Tractors is the other bright spot, where we believe the industry is poised for a strong cyclical recovery. We expect 2Ws and tractors to grow at a strong 13% and 15% CAGR, respectively, over FY25-27 (FY25: 12% and 6%). Conversely, we expect PVs and trucks to grow at 8% and 5% CAGR over FY25-27 (FY25: +2% and -4%)," it noted.
That said, one of the most critical sectors of rural India is flashing red.
Micro’s macro
The microfinance sector is currently undergoing a period of stress and rising delinquencies. While some of it can be attributed to seasonality, as agri slippages tend to rise during the first and third quarters of every financial year, the current spell has been compounded by rising borrower indebtedness, farm sector headwinds in many pockets and fall in collection efficiencies owing to elections in several states. This was evident during the current earnings season.
Shares of the country’s largest microfinance institution (MFI), CreditAccess Grameen, plunged 18% to hit its 52-week low on 27 January after the company swung to a net loss of ₹99.52 crore in Q3, contrasting sharply with the profit of ₹186 crore in Q2 and ₹353 crore a year back. Its operating income tanked 54.11% sequentially and 63.3% year-on-year, underscoring the severity of the situation.
Its peer, Spandana Sphoorty Financial, widened its net loss to ₹394 crore from ₹204 crore in the previous quarter.
Banks, too, have not been immune from the stress in the sector, though microfinance typically accounts for a minor share of their total loan book. Banks like IDFC First Bank, RBL Bank and Bandhan Bank as well as non-bank lenders like Piramal Capital and L&T Finance have flagged strain in their microfinance portfolios and heightened caution in the segment.
“Given the environment in the last few quarters in microfinance, we have significantly slowed down disbursals in that business," Axis Bank’s chief risk officer Amit Talgeri said during the company’s Q3 analyst call.
This raises an intriguing question. How is it that FMCG, auto, consumer durables and other industry segments are reporting good rural demand, but the microfinance sector is buckling under pressure?
“One key reason is the uneven recovery in rural income and expenditure patterns. While higher agricultural output, government support measures, and remittances may be driving discretionary spending in some areas, others remain vulnerable due to localized economic distress, erratic monsoons, or debt burdens," Saurabh Bandyopadhyay, senior fellow at the National Council of Applied Economic Research (NCAER), told Mint. “Additionally, access to formal and informal credit plays a role—while certain consumers are leveraging increased liquidity to spend, MFIs are facing repayment stress due to over leveraging and reduced repayment capacity in specific borrower segments," he added.
This is corroborated by the microfinance industry as well.
In its Q3 earnings call, Spandana Sphoorty’s MD and CEO Shalabh Saxena noted that with easy availability of credit, many borrowers had availed loans from multiple institutions, causing stress in their financial position. This has resulted in increased delinquencies across the sector.
Unlike urban areas, where socio-economic classifications are more standardized, rural India presents a more complex segmentation. According to Bandyopadhyay, a useful framework to understand rural consumers would be to segment them into four categories.
The first is ‘agrarian elite’, comprising large landowners and progressive farmers benefiting from high-value crops, exports, or government incentives. Next are the small and marginal farmers, who are highly dependent on monsoon patterns, market linkages, and MSP support. This segment often faces income volatility.
Rural wage labourers and migrant workers form the third group—they remain highly vulnerable to economic disruptions, as seen during the pandemic and periods of low employment opportunities.
The fourth group comprises non-farm rural households; they are engaged in rural services, small businesses, or employment in rural manufacturing clusters.
“Currently, small and marginal farmers, along with rural wage labourers, seem to be under stress due to fluctuating income sources, while agrarian elites and those engaged in non-farm rural enterprises appear to be relatively better positioned," Bandyopadhyay added.
Shining India
But surely it’s not all gloom and doom on the consumption front? A country where entire stadiums can be filled with people coughing up five-figure amounts to listen to Diljit Dosanjh and Coldplay must surely be home to abundant alcoves of affluence?
You bet.
One of the top performers of the Q3 results season has been real estate companies, which are seeing nearly unabated demand for premium and luxury offerings. Oberoi Realty’s Q3 net profit surged 71.7% on-year to ₹618.38 crore, while that of Bengaluru-based developer Sobha climbed 44% to ₹22 crore.
India’s largest real estate firm DLF delivered a 61% rise in net profit at ₹1,059 crore, while pre-sales jumped 34% to ₹12,093 crore on the back of robust demand, led by its ultra-luxury Dahlias project in Gurugram, where the price of a 10,000 sq feet apartment is ‘just’ ₹70 crore. Two penthouses in the project were sold for ₹150 crore each.
Sectors catering to the haves and have mores are clearly having a gala time. Even FMCG firms, which are facing demand headwinds in urban markets, are not facing any issues in the affluent segment.
“The secular trend of premiumization remains resilient with premium segments growing ahead of the mass segment this quarter. This indicates that consumer needs and aspirations to upgrade continue to evolve although they are currently opting for smaller packs to manage their overall spends," HUL chief Jawa noted.
For those keen on reading the tea leaves on India’s consumption sector, the consumer durables segment offers interesting insights.
Companies like Havells, Whirlpool of India and Voltas posted decent revenue growth and a sharp jump in profitability amid declining input cost pressures. However, the demand buoyancy masks an important underlying trend—the rise of easy financing options.
The consumer durables sector in India contributes to around 0.6% of India’s GDP, and is expected to grow at about 11% (CAGR) to reach ₹3 trillion by FY29, as per a report by EY-Parthenon.
But a major driver of this trend is the accessibility of Buy-Now-Pay-Later (BNPL) and easy credit options, including no/low-cost EMIs, zero down-payment, cashbacks etc. As per industry estimates, EMIs account for around half of consumer durables sales in the country, compared to 15-20% in 2018-19.
Surging sales of sub- ₹10,000 geysers and sub- ₹20,000 smartphones might be clinching evidence of a brimming economy, but when 50% and more of the sales are the direct result of easy financing options, the glass suddenly appears half full.
Perhaps the best insight into the direction of the macro wind, especially in urban India, came from the wedding platform Matrimony.com. The company’s Q3 revenue at ₹110 crore was down 3.5% sequentially and 5% on-year, with the management citing Google reports indicating an 8% decline in search queries for the matrimonial industry.
Member registrations have declined in line with industry trends, along with a marked decrease in top-of-the-funnel profiles, it added.
Investor corner
So, how should investors approach the consumption space at this juncture?
Analysts say while the urban demand weakness is persisting, recent policy measures like the substantial income tax relief in the Budget and rate cut by the RBI will lead to an increase in disposable incomes, which in turn is likely to give a fillip to sectors like two-wheelers, FMCG, real estate, travel and consumer durables.
“Investors should maintain exposure to the consumer sector in their portfolio as the theme has always demonstrated resilience along with growth potential. A targeted approach with a focus on market leaders and premium segment players can offer great investment prospects," Palka Arora Chopra, director, Master Capital Services, told Mint.
Companies which are category leaders and have a focus on premiumization tend to have strong market presence, brand loyalty, growth visibility, and the ability to pass on the cost pressures to end consumers.
“Also, a balanced exposure to premium urban brands and rural-centric value players can also be seen as a good strategy, while identifying the companies trading at reasonable valuations is also a key factor. This balanced strategy helps limit downside risks during market volatility, ensuring that portfolios are positioned to capture growth with evolving consumer trends and spending patterns," she added.
